1. Field of the Invention
The invention relates to the conduct of an automated auction, and in particular to automated conduct of an efficient dynamic auction for multiple objects.
2. Background Information
A number of auction formats are well known in the art. For example, there are several variations on the sealed-bid format, in which each bidder simultaneously and independently submits a sealed bid to the auctioneer. The sealed-bid format has at least two major disadvantages. One disadvantage of the sealed-bid format is that auction participants are not provided the opportunity to respond to their competitors' bids--in a sealed-bid auction, the earliest that any bidder gets to observe the other submitted bids is at the conclusion of the auction. Bidders thus are unable to infer information about the common-value component of valuation (that is, the component of value which is common to all the bidders) contained in their competitors' bids, and are unable to react to the common- value information in their subsequent bidding.
A second disadvantage of the sealed-bid format is that the auction process effectively reveals the valuation of the highest bidder to the auctioneer. Suppose that a broadcast license were to be sold by a second-price, sealed-bid auction (often known as the Vickrey auction, after Vickrey (1961), who proposed an auction in which the auctioned object is awarded to the highest bidder, but he is only charged the second-highest price). Say that Bidder A, who valued the license the most, placed a value of $200 million on the license, while Bidder B, the second-highest-valuation buyer, placed a value of only $50 million on the license. If the auction process were fully trustworthy, and if bids were kept fully confidential, Bidder A would like to submit a sealed bid of $200 million, and Bidder B would like to bid $50 million. However, bidders may fear the following scenario. The seller, knowing after the bidding that Bidder A actually values the license at $200 million, may attempt to renege on the sale, and renegotiate the price above the $50 million established by the second- price auction. Alternatively, the seller, after receiving the $200 million sealed bid, may surreptitiously plant a bogus $199 million bid (or enlist a "shill" to insert a bid in his own name). Finally, if the seller is the Government, the seller may fear the public-relations disaster when it becomes generally known that it is selling a public asset which Bidder A values at $200 million for a price which is a mere quarter of that value.
Another example of an auction format well known in the art is the standard open ascending-bid format, in which each bidder is allowed to place a bid greater than the previous bid on any object, and is aware of all prior bids and by whom they were placed. This format has the disadvantage that the price paid by a bidder for the objects that he wins depends on the bidder's own bids. Consider any bidder who demands a significant proportion of the objects being auctioned. The bidder has an incentive to engage in "demand reduction" and to "shade" his bids relative to what the objects are worth to him. This may result in an inefficient allocation of the objects being auctioned, as well as a reduction in the seller's auction revenues.
The best-known examples of sealed-bid auctions in the art include: the U.S. Treasury's "discriminatory" auctions of bonds and bills; the U.S. Treasury's "uniform-price" auctions of bonds and bills; and the Vickrey auction, proposed by Vickrey (1961). Each of these auctions is a sealed-bid format, and so suffers from the disadvantages described above: the absence of any possibility for bidders to react to their competitors' bids; and the revelation of the high-bidder's value to the auctioneer. In addition, the Treasury auctions share the same disadvantage as the standard open ascending- bid auction, that substantial bidders have the incentive to engage in demand reduction and bid shading. Meanwhile, the Vickrey auction has the additional disadvantage of being perceived as complicated and unintuitive to bidders.
The best-known examples of standard open ascending-bid auctions in the art include: the open-outcry auctions of Sotheby's and Christie's; and the Federal Communications Commission's auctions of airwaves. Each of these auction formats has the disadvantage that the price levels paid by a bidder are influenced by the bidder's own bids, so that as described above, a substantial bidder has the incentive to engage in demand reduction and bid shading, reducing allocative efficiency and expected revenues.
The main economic efficiency objectives in the design of an auction are twofold: to maximize the allocative efficiency of the auction outcome; and to maximize the seller's expected revenues. These objectives are believed to be best accomplished by adhering to three fundamental guidelines. First, an auction should be structured so that the price paid by a winning bidder is as independent as possible of that bidder's own bids. This provides each participant with full incentive to truthfully bid his value for the objects in the auction, without any shading of bids. Second, an auction should be structured so as to maximize the information which is available to each bidder at the time that bids are placed. This is believed to cause bidders to bid more aggressively than in a sealed-bid format, since bidders recognize the common-value component reflected in their competitors' bids. Third, an auction should be structured so as to avoid, as much as possible, the need for the highest bidder to reveal his true value. This prevents the seller, and other buyers, from later using this information against him, thus giving high bidders the confidence to bid up to their true values.
Ideally, an auction format would adhere to all three fundamental guidelines of the previous paragraph. However, in the context of auctions of multiple objects, no such format has previously been disclosed. The standard open ascending-bid auction does not satisfy the first fundamental guideline; while the sealed-bid auction does not satisfy either the second or the third fundamental guidelines.